Tuesday, 18 October 2016

Softening Inflation offers scope for another Rate Cut in FY’17.

Benign inflation numbers and likelihood of a dovish monetary policy committee stance leaves the door open for further monetary policy easing this fiscal. The move could fuel additional growth by supporting government’s effort to boost economic growth to above 8 per cent to create job opportunities.

The sharp retreat in consumer inflation to a 13-month low at 4.31 per cent in September 2016 from 5.05 per cent in August 2016 is indeed a good reason for cheer, particularly when the festival season is round the corner. Retail inflation, the RBI’s benchmark price gauge has fallen below the tolerance level, leaving scope for a reduction in policy rates. The government had recently notified an annual inflation target of 4 per cent plus or minus 2 percentage points.

Further, India's wholesale prices cooled in September after touching a two year high in August. WPI inflation in September was 3.57 per cent compared with 3.74 per cent in August. Similar to retail inflation, the drop in wholesale inflation is attributed to easing food prices. Good rains kept a lid on food prices as food inflation moderated to 5.75 per cent year-on-year in September 2016 and lower than 8.23 per cent in the previous month.

The recently formed Reserve Bank of India Monetary Policy Committee, under new Governor Urjit Patel, slashed the rates by 25 basis points to 6.25 per cent in a surprise move on October 4, 2016, after inflation hit a five-month low in August.

The change in the RBI’s policy position with respect to the cut in real interest to 1.25 per cent from the 1.5 per cent -2.0 per cent range along with expanding the time to achieve 4 per cent inflation by three years to March 2021 from March 2018 provides with additional room for monetary easing in the near-term.
Since the start of 2015, the RBI has cut 175 basis points from its key repo rate. But, after the next expected cut to 6 per cent, the central bank is now projected to hold rates steady for the rest of the 12-month survey horizon.

A rate cut from here-on would help the Indian government in its efforts to lift the economic growth to above 8 per cent. It was last measured at 7.1 per cent in the March-June quarter from 7.5 per cent in the year ago period.

Latin Manharlal

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